It was a small item in the sports pages on Tuesday. P J Banville, star forward with the Wexford county Gaelic football team, wouldn't be in the squad for next season. He and his girlfriend are emigrating to Australia.

Gaelic players are Ireland's local heroes. They don't get paid, but the esteem in which they are held means they're usually in the front line when jobs are being filled. If a 24-year-old star like Banville doesn't see a future for himself in Ireland, it is hardly surprising that even the government is planning for the emigration of at least 100,000 people over the next four years – 45,000 next year alone.

Mass emigration has always been the index of Ireland's failure. The last big economic slump in the 1980s produced what was called "the Ryanair generation". Between the lines of the government's delusional optimism, one can read the hope that the young will again take up Michael O'Leary's offer of cheap seats to more prosperous places. Better that they should leave than to remain as angry obstacles to the process of making ordinary citizens pay for the idiocy and greed of a political and financial elite.

It is hard to come up with good arguments to persuade any mobile, well-educated, twentysomething to stick around for what the semi-official Economic and Social Research Institute recently called a "lost decade" of stagnation. As well as the prospect of low growth, high unemployment and a downward spiral of ever harsher austerity measures, there is the bitterness of working to pay off the gambling debts (currently set at €50bn) of property developers and bankers.

Yet, if mass emigration does take hold again, it will be a disaster. The haemorrhaging of its youth has, over the centuries, robbed Ireland of much of its social and economic dynamism. The reversal of that flow in the 1990s created enormous confidence. It seemed that Ireland had at last emerged from its bleak history. To lose the confident, well-educated generation that grew up in those optimistic years wouldn't just be a terrible psychological blow. It would also make nonsense of Ireland's aspirations to be a dynamic, innovative economy. Can this fate be avoided? Yes – on two conditions.

The first is a rational settlement with the European Union. It is not in the EU's interests for Ireland to go to the wall. The European Central Bank is already keeping the Irish banking system afloat, recognising as it does that the eurozone could not survive the collapse of one of its members. The question now is not whether Ireland will have to resort to the European stabilisation fund. It is on what terms help will be given.

The EU would be justified in imposing harsh conditions: the Irish crisis is largely the fault of the Irish. But this should be outweighed by more rational considerations. High interest rates and excessive austerity will drive the Irish economy further downwards, and will therefore be self-defeating. Given a deal that is not financially punitive, Ireland has great potential for recovery.

The other side of this deal is that Ireland has to change radically. There is no point in rescuing Ireland if the only effect is to keep in power the elites and systems that created the catastrophe. Ireland has to use this crisis to destroy its toxic political culture. It must replace it with something many people assume already exists – a republic. Approaching the centenary of the declaration of the Irish republic in 1916, this ideal has never seemed more hollow. The emergence of a republic in Ireland has been stymied by a range of factors: the overweening power of the Catholic church until the 1990s, the hijacking of the word "republican" by violent conspiratorial fantasists, the corruption that turned the state into a vehicle for private interests. Yet it remains an idea that has the power to galvanise Irish people.

Much of Irish sovereignty has been lost as a result of the debt crisis. But there is still a great deal that citizens can do. They can reshape the political system so that it offers genuine choices instead of the false alternatives of two rightwing populist parties. They can pioneer new forms of democratic engagement at local level and demand a parliament that actually holds government to account. They can create a public morality that is intolerant of the cronyism, corruption and impunity that have been so corrosive of trust in both politics and business.

Above all, Ireland has the capacity over the next five years to embrace the kind of ethical austerity that took hold in the UK and elsewhere after the second world war. Back then, hard times were used to create a culture of public decency in which access to housing, pensions, healthcare and education were the building blocks of a common citizenship. Ireland has mastered the "hard times" bit of this formula. It needs the courage and ambition to use them properly. If it does so, it can emerge as a republic that an intelligent young person might be proud to live in.

Fintan O'Toole's Enough is Enough: How to Build a New Republic is published by Faber.